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Chapter 13 — ADVANTAGES OF MUTUAL FUNDS
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ADVANTAGES OF MUTUAL FUNDS

ADVANTAGES OF MUTUAL FUNDS

The advantages of mutual funds make them the best investment type for people who do not have the time or expertise to manage their own portfolios.

Advantages of mutual funds

PROFESSIONAL MANAGEMENT

One of the main Advantages of Mutual Funds is that it is a relatively inexpensive way for a small investor to get a full-time professional investment manager, so he doesn’t need to pick stocks and manage investments. The manager usually has a good experience and access to the specific information that the average investor doesn’t have.

DIVERSIFICATION

Your risk is spread out across many different holdings if you own shares in a mutual fund instead of individual stocks or bonds. In this way you do not put all of your eggs in one basket – the more stocks and bonds you own, the less any one of them can seriously hurt your finances.

ECONOMIES OF SCALE

Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual investor would pay for securities transactions. Moreover, a mutual fund, since it pools money from many smaller investors can invest in certain assets or take larger positions than a smaller investor could. For example, the fund may have access to IPO placements or certain structured products only available to institutional investors.

SIMPLICITY

Buying a mutual fund is fairly straightforward. Many banks or brokerage firms have their own line of in-house mutual funds, and the minimum investment is often small. Most companies also have automatic purchase plans whereby as little as $100 can be invested on a monthly basis. Brokers can also purchase any other listed mutual fund on behalf of clients.

VARIETY

Mutual funds today exist with any number of various asset classes or strategies. This allows investors to gain exposure to not only stocks and bonds but also commodities, foreign assets, and real estate through specialized mutual funds. Some MFs are even structured to profit from a falling market (known as bear funds). Mutual funds provide opportunities for foreign and domestic investment that may not otherwise be directly accessible to ordinary investors.

TRANSPARENCY

Mutual funds are subject to industry regulation that ensures accountability and fairness to investors. Transparency helps reduce price volatility because all market participants can base decisions of value on the same data. Companies also have a strong motivation to provide disclosure because transparency is rewarded by the stock's performance.

Quiz

Which of the following is not a benefit of investing in mutual funds?

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Incorrect
0/76 (0%) Correct
  • 1
    Diversification
  • 2
    Professional management
  • 3
    Higher returns than the overall market
  • 4
    Low management fees
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